Pepco Holdings Inc. (POM) today reported second quarter 2010 earnings from continuing operations of 36 cents per share, well above the Zacks Consensus Estimate of 22 cents and double of 18 cents earned last year.
The improvement in earnings was driven by higher distribution revenues, higher transmission revenues, higher unbilled revenues associated with Atlantic City Electric basic generation services, lower operation and maintenance expenses, and a favorable income tax adjustment.
Operational Performance
Pepco’s net revenues of $1.63 billion fell short of the Zacks Consensus Estimate of $2.38 billion. Revenues also declined marginally (1.8%) from the year-ago quarter. By segment, operating revenues in the quarter improved 5% at Power Delivery segment, while it fell 15% at Pepco Energy Services and 7% at the Other non-regulated segment.
In the quarter, Power Delivery electric sales rose 6.5% to 12,056 gigawatt hours (GWh), as a result of a 77% rise in cooling degree days. Weather-adjusted electric sales were 11,457 GWh, which was almost flat compared with 11,439 GWh a year ago.
Pepco’s total operating expenses in the second quarter improved 5% to $1.4 billion, on account of lower fuel and purchased energy (down 9%) and other operation and maintenance costs (down 2%), offset by a rise in depreciation and amortization expenses (up 9%).
Pepco’s weighted average shares outstanding in the quarter increased to 223 million from 220 million in the same period last year.
Financials and Other
As of June 30, 2010, Pepco Holdings had cash and cash equivalents of $34 million and long-term debt of $3.6 billion. Total long-term liabilities at quarter-end were $4.1 billion compared with $4.9 billion at year-end 2009. Total shareholders’ equity at quarter-end was $4.2 billion.
During the second quarter, Pepco progressed significantly in executing its business plan. The company completed the sale of Conectiv Energy’s wholesale generation business, used the sale proceeds to pay down debt and filed a natural gas base rate case for Delmarva Power.
Outlook
Pepco Holdings reaffirmed its 2010 earnings guidance range of 80 cents to 95 cents per share. This guidance range excludes the results of discontinued operations and the impact of any special or extraordinary items.
We remain positive on the company’s business and restructuring plans. We like Pepco Holdings’ stable customer base, high priced contracts, sale of non-core operations, high dividend yield and gradually improving fundamentals at its core regulated gas and electric utility operations. In our view, Pepco has been an attractive investment based on its relatively high dividend yield of 6.4%, which we consider sustainable.
However, going forward, we expect the stock to face stiffer competition from its fully regulated peers with similar dividend yields. We maintain our long-term Neutral recommendation on Pepco as we expect it to benefit from the disposal of its non-core Conectiv generation assets. Our short-term rating on Pepco is a Zacks #2 Rank, which translates into a Buy recommendation.
